2021 (3) TMI 668 - ITAT KOLKATA - Income Tax

Head Note / Extract:
Addition on account of proportionate interest in respect of investment in shares - assessee has made investment in shares from which tax free dividend income was earned - AO noted that the assessee’s total investment in shares is 12% of the borrowed funds, therefore he disallowed proportionate interest @ 12% of the total interest paid and disallowed - HELD THAT:- CIT(A) has noted after perusal of the balance sheet of the assessee for AY 2004-05 that the assessee had own funds of ₹ 101.25 crores whereas investment in shares is only to the tune of ₹ 11.35 crores which is only 11% of the own funds and therefore we note that no disallowance based on the reasoning of AO is correct. The Hon’ble Bombay High Court in the case of Reliance Utility and Powers Ltd. vs. CIT held that when the assessee possesses mixed funds which include its own funds in sufficient quantity, a presumption that its own funds were utilized for the advances is to be drawn. Relying on the ratio of decision of Hon’ble Bombay High Court in Reliance Utility and Powers Ltd.[2009 (1) TMI 4 - BOMBAY HIGH COURT] we are of the opinion that in the facts of this case, no proportionate disallowance based on the AO’s reasoning cannot be accepted and therefore we confirm the order of Ld. CIT(A) and dismiss the ground No. 3 raised by the Revenue. Addition on account of an advance to subsidiaries from borrowed funds - HELD THAT:- As decided in own case [2008 (1) TMI 426 - ITAT CALCUTTA-D] from the annual accounts of the sister concern, it is evident that no loan was given to any of the directors or to any firm/company in which such director was interested. In fact, it was reported by the auditors of that the recipient company that it did not advance any sum to any -of its director or any other firm /company in which such director if interested. Having said this and, relying on the decision of S.A. Builders Ltd [2006 (12) TMI 82 - SUPREME COURT] we are agree with the AR that the advance in question was towards equity and given from time to time out of pure commercial expediency and to protect its own financial interest. Even otherwise, we note that the advances given by the assessee company from time to time was against the issue of share capital. It has been placed on record that the assessee was actually allotted shares in a subsequent year out of the advances paid. Hence it is not the case that the funding was for a temporary adjustment and hence should not be equated with a normal loan. If that be so, there should not be any question of interest payable on a permanent fund introduced by the assessee company forming part of the capital of the sister concern. In the balance Sheet of the .sister concern also, the amount has been shown as forming part of the shareholders’ fund. Addition on account of advertisement expenses - HELD THAT:- Tribunal in assessee’s own case for AY 2002-03 has restricted the disallowance at 2% of the estimate.Respectfully following the Tribunal’s decision in assessee’s own case we restrict the disallowance at 2% of the advertising expenses thus, revenue’s ground no. 3 is partly allowed. Addition on account of staff welfare expenses - HELD THAT:- As staff recruitment expenses were incurred only exclusive for the purpose of business and hence allowable expenditure. We note that the expenses on account of employees’ relation expenses was incurred for efficient functioning of the business which pertains to employees meals on duties, medical expenses, medical insurance, uniform expenses etc. and these expenses are incidental to carrying on the business which is crucial in the hotel industry. Therefore, it satisfies the condition that it was expended wholly and exclusively for the purpose of business and thus allowable u/s 37(1) of the Act. Therefore, we confirm the order of Ld. CIT(A) and this ground of appeal raised by the revenue is dismissed.